Category: Markets

The article examines the challenges facing the non-implementation of the ‘ECOWAS’ Protocol on the Free Movement of goods, services, persons and capital. In its finding, several problems including the lack of Political commitments, administrative restrictions, civil conflicts, wars and terrorism are major obstacles to the implementation of the Protocol on free movement of goods, services, persons and capital in West Africa. Thus the Paper recommends that ECOWAS’ leaders should seriously address those obstacles in the implementation of the Protocol.

Introduction
Indeed, the 15 nation ECOWAS came into force on 28th May 1975, when the Treaty was signed in Lagos, Nigeria, by a group of countries comprising Dahomey (now Benin), The Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra-Leone, Togo, and Burkina Faso (former Upper Volta). Cape Verde acceded to ECOWAS in 1977. Hence, establishing a market of 280 million consumers and a geographical area of 6.2 million square kilometres. However, the Treaty from inception has been faced with a series of challenges, including security, underdevelopment and the implementation of the Protocol on Free Movement of Goods, Persons and the Right to Establishment in the member States. The ECOWAS Constitution is the Lagos Treaty of May, 1975 and its objectives include: Economic stability among the member States, improve the standard of living of their people, customs union, freedom of movement of persons, capital, services, agriculture, transportation, telecommunication, energy and development, industrial master plan.

Several reasons will push states to create/form economic integration among them. Indeed, reasons like economic weakness, dependence status, economies of scale and scope, political influence, security and stability may lead to it. For instance, in the West African Sub-region the principal reasons that pushed for economic integration include to encourage intra West African trade which was less than 4%, to strengthen their weak economies, improve the living standard of their people and be independent of extra African powers in the realpolitik game as a consequence of the Cold War.[1] Since the Protocol on the Free Movement of Persons, Right of Residence and Establishment was put in place in 1979.

Vijay Mahajan is the author of three books on market opportunities in the developing world: The 86% Solution, Africa Rising and his most recent book Arab World Unbound: tapping into the power of 350 million consumers. All three books focus on the market power of the 86 per cent of the world population who live in the developing world. He speaks to Zara Ruban about how the multinational companies can engage with consumers in those economies.

Vijay Mahajan’s well known for his research and books on opportunities for businesses in the developing world. He is passionate about his subject and anyone who speaks with him is infected with the same enthusiasm. For him it is time that the world recognizes the potential for growth in these often neglected markets. Any company who is interested in growth and revenue will take his work seriously. Eighty-six per cent of the world population live in the developing world, where the GDP per capita is less than $10,000 dollars, the other 14 per cent live in the developed world. Professor Mahajan believes that all the opportunities in the future will be in the 86 per cent world, his extensive research in China, Africa, India and the Arab world supports that position. However, companies in the 14 per cent world have to change their mind-set in order to engage with the 86 per cent in the developing world.

Professor Mahajan has famously labelled that mind-set the 2,400 square feet mind-set. It is simply based on the size of the average American family home, one family room, living room, breakfast area, two car garages or three, buy one get one culture. And all the marketing is dictated by this mind-set. This is not what obtains in the 86 per cent world where GDP per capita is far less than $10,000.

In contrast in New Delhi for example, a professional man and his wife and children would probably live in a 750 square feet apartment, with a smaller kitchen there would be fewer and smaller appliances, therefore there would be less space for storage, which would mean more frequent visits to the market or local shopkeeper. Foreign companies who want to do business with the 86 per cent world have to change their mind set and consider new rules of engagement.

The indicators for growth

I asked Professor Mahajan why businesses would be interested in Africa, given the low GDP and its infrastructural challenges. Professor Mahajan ‘s view is that there are opportunities for those who look beyond the GDP and those statistics, there are opportunities anywhere where the GDP is close to $1,000. What then are those indicators for growth?

An indicator which is not immediately apparent to the foreign observer is the ‘shadow economy’, this operates beneath the actual economy. Professor Mahajan maintains that the GDP per capita does not tell the whole story, looking at the GDP of most African countries one would have expected that the mobile phone would be out of reach of most of the African population. But that is not the experience of the mobile phone industry in Africa. Africa is the fastest growing mobile market in the world, and the second larges after Asia; it is likely to surpass Asia in the very near future. It is predicted that sub-Saharan mobile phone subscribers will be about 800 million by the end of this year. The population of sub-Saharan Africa is estimated to be about 830 million in 47 countries. The shadow economy is therefore important and its size is a strong indicator of growth.

A second indicator relates to the percentage of the economy controlled by consumers
This is very important from the marketing point of view. In the US, the consumer controls 70 per cent of the economy and the remaining 30 per cent is accounted for by the government, federal, state and local governments.

Africa is more consumer driven than China. So when you look at their average consumption expenditure per capita for Africa in comparison to China, you will see that China has a big chunk of their economy controlled by the government and the consumer economy controls about 27%, while Africa averages about 49%, almost half of their economy is controlled by consumers. This is an important indicator and is the reason why these economies present such exciting prospects. Wherever the government has less control than the consumers, the consumers are then in a position to demand goods and services, and there lies the opportunities for foreign as well as local businesses.

It is estimated that by 2020 over 50 per cent of the world GDP will be from the developing markets. If this forecast holds true, Professor Mahajan’s view is that this would give the 86 per cent club a major power in influencing the flow of commodities and trade in the global economy. The US, for example, under Obama has a major initiative to increase US export and so is the case with other countries in Europe, China and Asia. Naturally when the consumers have such buying powers and numbers, everybody will be clamouring to find out what they can sell to them.

Another indicator for growth is the growth of the African middle classes.
At the time of researching his book, Africa Rising, Professor Mahajan found the IMF and World Bank definition of the middle class was inadequate in understanding and identifying a corresponding demography in Africa. He found that the IMF’s and World Bank’s definition were ’14 per cent focused’ and therefore unhelpful. In almost all Western economies, the middle class is divided into five groups: A B C D E.
And sometimes even within A B C D E you may have a C1 and C2 and C3, but the definition of A B C D E is very local. The middle class in the US would be very different from the middle class in the UK or in Nigeria.

In his inimitable style, Professor Mahajan decided to look elsewhere, he spoke to the advertising and research agencies, to the companies trading in Africa and found that they had developed their local based definitions. That assisted him to develop his own definition and so he identified this class as the C class, so as to avoid confusion with the World Bank’s and IMF’s definition. The A and B group became Africa1, C Africa 2 and D and E, Africa 3.

Africa 2, turned out to be anywhere between 300 million to 500 million. He estimated that about 40% of Africa would be in the C group. Typically the people who come in the C category would be say, teachers, civil servants, nurses and in many countries these may be the physicians who are government employees. They are neither poor nor rich. Interestingly, this class would also include people who are working in the hospitality industry. The hospitality industry is relevant here because of the shadow economy. Many of the people in the hospitality industry are not only living on their salary; they are also living on tips, which are often larger than their wages.

The C class, is the aspirational class, they are the people who want to give their children more than they have, they will save money to buy them the uniform. They’re the ones who work overtime to make sure that they can pay their child’s school fees. They are the ones who want private schools, not the expensive one, just a little better than the state schools. It is their aspirations that are common to this class.

No Logo No Sale

Professor Mahajan believes that the level of brand conscious in sub-Saharan Africa provides another opportunity for foreign companies. He found that Africans in sub-Saharan Africa are the most brand conscious people he came across in his research, far more than Indians or Chinese. And this cuts across classes. Even a local driver is brand conscious; he would readily show off his shirt with some logo or another, even though it was bought in a used clothes stand somewhere by the side of the road. Where people buy used clothes, they would only buy used brands. The same went for cars. Rather than buy a brand new unbranded car, the young men would rather be seen driving a a used BMW.

Therefore the challenge for the multination should be to organise the market, so that if people are going to buy the used brand, they would organize the market so that they buy ‘my used brand’. This creates brand loyalty so that when they want to migrate to a new model they migrate to a new model of ‘my brand’. Even more importantly, a used care market creates a market for the spare parts and probably servicing. Brand consciousness is quite dominant in sub-Saharan Africa and this is because of aspiration, irrespective of locality, culture, religion, the Africa 2 are very aspirational people.

Selling to the 86 percenters

With all these in mind, Professor Mahajan developed new rules engagement. In the 86 per cent Solution, he puts forward about eight or nine rules of engagement and in Africa Rising, three or four more rules and the same with the Arab Market Unbound. His thesis is that those who want to access the 86 per cent market have to start developing the solution, the products and services that will address the needs of the 86 percenters. We talked about the interesting example of Haier, a Chinese company that builds refrigerators which can be dismantled for ease of transportation in those countries where you do not usually have elevators in family accommodations.

Local knowledge

Professor Mahajan stresses that global brands cannot underestimate the strength of local competition. He cites an interesting example of a local soft drinks brand in Algeria. Hamoud, stands as a real challenge to Coca Cola’s global domination. The Algerians have a a little joke that Hamoud outlasted the French occupation which lasted more than 100 years. Hamoud understands the local market, the product is affordable and they have a huge brand loyalty amongst Algerians in and outside Algeria. Multinational companies have a tough time competing with Hamoud in Algeria.

Distribution

Distribution still poses real challenges in many of these economies. Professor Mahajan argues that Trade in these emerging economies are still very local, what he describe as ‘market stall’ economies i.e. small stalls run by individuals. While big shopping malls are being built in all the capital city, the fact of the matter is that trade is still predominantly ‘market stall’.

Distribution is also determined by the extent to which a country has been urbanised. A high percentage of the population in the developing world (including China), still live in the rural areas, for example India tops the list with 70 per cent of its population in the rural areas, Nigeria and Ethiopia feature high up in the list too. These countries are not going to have modern trade overnight; therefore a lot of the trade is limited to the urban centres. It is therefore not surprising that multinational firms restrict themselves to the urban centres, to the Shanghais and the Beijings and the Lagos and the Mumbai, Karachi, Lahore, their story basically right now are the urban centres. Except for a handful of companies. like Coca Cola in Africa, which has been in Africa for 90 years. Many just come and go. The next frontier is going to be the rural markets.

Coca Cola broke the mould, they have amazing knowledge about distribution. And they have gone to every nook and corner delivering their product by every conceivable means and as a matter of act they say that their biggest strategic advantage is distribution and their knowledge of that sector.

Global brands that understand the distribution system can have a competitive advantage. It would appear that the local brands, with their knowledge of the local market, would have the advantage over any foreign competitor. Professor Mahajan found that the multinationals have a huge advantage on their side. In his research in Africa, he found that work with advertising agencies, such as Saatchi and Saatchi. The multinationals, through the marketing research groups and through the advertising agencies gain the local knowledge they need and at the same time try to organise these markets.

Professor Mahajan also went to on discuss another more strategic advantage that the multinationals have over local competition, a phenomenon he terms ‘ricoche economy’

Besides their bank of research companies, advertising agencies etc. who bring them the much needed insight and local knowledge, they also have a high number of foreign born citizens. In the US 40 million US citizens were born outside the US, and 90 per cent of those come from the 86 per cent economies. These companies have access to the talent of their ‘immigrant’ citizens who are originally from the 86 per cent world. This segment of the population has now become a strategic advantage, because they still have connections with their country of origin. So as an example, when a US company needs a country manager to open up its market in say India, it is likely to find someone with connections with their Indian heritage to send over.

Beyond that, these foreign born citizens with connections in their country of origin create new business opportunities for businesses in the country of birth and where the country where they are domiciled. Telephone companies are paying attention to their long distance call clients who make regular calls to places in India and Africa and even business in those countries are paying attention to those in the diaspora, internet shops have sprung up to enable them to send gifts to loved ones in their countries of birth.
Professor Mahajan gave the example of a Kenyan supermarket that among other things provides services for Kenya’s in the diaspora. Nakumatt, which proudly describes itself as the Wal-Mart of East Africa runs an online store where Kenyan immigrants in the UK for example can buy products online and the products are delivered to their family in Kenya.

Bring your own Infrastructure

There are market opportunities for foreign businesses in the emerging economics, the question that remains is whether or not they can replicate their success in these emerging economies. One of Professor Mahajan’s exciting rules of engagement is what he coined ‘bring your own infrastructure’. He used the success of Coca Cola in Nigeria to illustrate the point. Coca Cola is available anywhere in Lagos, Nigeria for example, in the big hotels, restaurants and by the road side, but regardless of where you buy a bottle of Coca Cola in Lagos, you can be sure that in the sweltering heat of that city and despite the notorious power failures, you will get a cold bottle of Coca Cola. Coca Cola is kept on ice in a cooler at the side of the road. Coca Cola has one of the biggest ice making plants in Lagos. Coca Cola has a strategy that makes the ice and the cooler available to its sellers who qualify by selling an agreed number of bottles a day.

The foreign companies need not wait for all the infrastructure to be in place before they enter the market, they just bring their own infrastructure with them. Since 1948 only a handful of countries have joined the $10,000 per annum GDOP club and by American standards that figure falls within the poverty line. The infrastructure of the 86 per cent of the world market (which could quite possibly rise to 90 per cent in the next decade) will not match that of the Western economy anytime soon, and hence companies like Coca Cola do not wait around for the infrastructure to improve, they are creating their own.

This is also true when we look at the newer technologies, which have allowed for innovative solutions such as mobile banking which has reached a large proportion of these populations who do not ordinarily have bank accounts.

There are exciting times ahead and immeasurable rewards for those who dare to break out of their 2,400 square feet mind-set.

About the author

Vijay Mahajan holds the John P. Harbin Centennial Chair in Business at McCombs School of Business, University of Texas at Austin. He is a former dean of the Indian School of Business in Hyderabad. Prof. Mahajan is one of the world’s most widely cited researchers in business and economics, and has been invited by more than 100 universities and research institutions worldwide for research presentations. His last book on market opportunities in developing countries, “The 86 % Solution,” received the 2007 Book-of-Year Award from the American Marketing Association. He has published ten books to date, edited the Journal of Marketing Research, and has consulted with Fortune 500 companies and delivered executive development programs worldwide. He has extensive research in product diffusion, marketing strategy and marketing research methodologies. Mahajan has received numerous lifetime achievement awards including the American Marketing Association (AMA) Charles Coolidge Parlin Award for visionary leadership in scientific marketing. The AMA also instituted the Vijay Mahajan Award in 2000 for career contributions to marketing strategy.